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The report was developed under the direction of the Energy Commission's 2009 Integrated Energy Policy Report Committee. As in previous Integrated Energy Policy Report proceedings, the Committee recognizes that close coordination with federal, state, and local agencies is essential to adequately identify and address critical energy infrastructure needs and related environmental challenges. In addition, input from state and local agencies is critical to develop the information and analyses that these agencies need to carry out their energy-related duties. This 2009 Integrated Energy Policy Report reflects the input of a wide variety of stakeholders and federal, state, and local agencies that participated in the Integrated Energy Policy Report proceeding. The information gained from workshops and stakeholders along with Energy Commission staff analysis was used to develop the recommendations in this report. The Committee would like to thank participants for their thoughtful contributions of time and expertise to the process.

The 2009 Integrated Energy Policy Report proposes policy and program direction to address the many challenges facing California's energy future that are discussed throughout the body of the report. Specific recommendations are presented in Chapter 4, but the Energy Commission believes that certain policies and programs have priority and even urgency if California is going to address its diverse set of energy goals. The Executive Summary therefore identifies those actions and policies that the Energy Commission considers to be of highest importance.

Executive Summary

Introduction

As California pursues its goal to address climate change by reducing greenhouse gas emissions, the driving force for the state's energy policies continues to be maintaining a reliable, efficient, and affordable energy system that minimizes the environmental impacts of energy production and use. Although the economic downturn has reduced energy demand in the short-term, demand is expected to grow over time as the economy recovers. It is essential that the state's energy sectors be flexible enough to respond to future fluctuations in the economy and that the state continue to develop and adopt the "green" technologies that are critical for long-term reliability and economic growth.

Assembly Bill 32 (Núñez, Chapter 488, Statutes of 2006), the Global Warming Solutions Act of 2006, established the goal of reducing greenhouse gas emissions to 1990 levels by 2020, and serves as the comprehensive framework for addressing climate change. However, many of the policies in place prior to passage of AB 32 are also valued for their role in meeting the state's climate change goals. One of these policies is the loading order for electricity resources, which calls for meeting new electricity needs first with energy efficiency and demand response; second, with new generation from renewable energy and distributed generation resources; and third, with clean fossil-fueled generation and transmission infrastructure improvements. A second important policy in place prior to the passage of AB 32 is the Renewables Portfolio Standard, established in 2002, which currently requires retail sellers of electricity to procure 20 percent of their retail sales from renewable resources by 2010.

More recently, Governor Schwarzenegger issued Executive Orders in 2008 and 2009 that established the Renewable Energy Action Team to develop a plan for renewable development in sensitive desert habitat, accelerated the Renewables Portfolio Standard requirement to 33 percent by 2020, and directed the Air Resources Board to adopt regulations by July 31, 2010, to meet that requirement.

While reducing greenhouse gas emissions is of paramount concern, it is not the only environmental issue facing California's electricity sector. The State Water Resources Control Board has issued a draft policy to phase out the use of once-through cooling in the state's 19 coastal power plants to reduce impacts on marine life from the pumping process and the discharge of heated water. Another issue is the lack of emission credits in the South Coast Air Quality Management District that makes it difficult to obtain the necessary permits to build reliable replacement power before aging, less-efficient power plants can be retired or repowered.

The transportation and building sectors are primary contributors to greenhouse gas emissions in California. Governor Schwarzenegger's Executive Order S-01-07 established a low-carbon fuel standard for transportation fuels sold in California that will reduce the carbon intensity of California's passenger vehicle fuels by at least 10 percent by 2020. In addition, the Alternative and Renewable Fuel and Vehicle Technology Program created by Assembly Bill 118 (Núñez, Chapter 750, Statutes of 2007) is working to develop and deploy alternative and renewable fuels and advanced transportation technologies to help meet the state's climate change policies. Further, the federal government in June 2009, granted California's request for a waiver that allows California to enact stricter air pollution standards for motor vehicles than those of the federal government. The standards (Assembly Bill 1493, Pavley, Chapter 200, Statutes of 2002) are expected to reduce greenhouse gas emissions from California passenger vehicles by about 22 percent in 2012, and about 30 percent in 2016, while improving fuel efficiency and reducing motorists' costs.

This Executive Summary focuses on the policy recommendations that the Energy Commission believes should be the state's top priorities for meeting the goal of providing reliable, efficient, and cost-effective energy supplies for its citizens. Additional recommendations for specific actions needed in the various energy sectors are provided in Chapter 4.

Since deregulation in 1998, the Energy Commission has licensed more than 60 power plants: 44 projects representing 15,220 megawatts are on-line, 6 projects totaling 1,578 megawatts are under construction, and 12 projects totaling 6,415 megawatts are on hold but available for construction. In addition, the Energy Commission has a historic high level of more than 30 proposed projects under review, totaling more than 12,000 megawatts, many of which are large-scale solar thermal power plants that present new and challenging environmental impacts that must be considered.

On the demand side, Californians consumed 285,574 gigawatt hours of electricity in 2008, primarily in the commercial, residential, and industrial sectors (Figure E-2). The Energy Commission staff forecast of future electricity demand shows that consumption will grow by 1.2 percent per year from 2010-2018, with peak demand growing an average of 1.3 percent annually over the same period. The current forecast is markedly lower than the forecast in the 2007 Integrated Energy Policy Report, primarily because of lower expected economic growth in both the near and long term as well as increased expectations of savings from energy efficiency.

Figure E-2: Electricity Consumption by Sector 2008

Source: California Energy Commission

Because of economic uncertainties surrounding the current recession and the timing of potential recovery, the Integrated Energy Policy Report (IEPR) Committee directed staff to look in its forecast at alternative scenarios of economic and demographic growth and their impacts on electricity demand. Staff analyzed both optimistic and pessimistic scenarios and found only small differences in projected electricity demand. Annual growth rates from 2010-2020 for electricity consumption and peak demand would increase from 1.2 percent and 1.3 percent, respectively, to 1.3 percent and 1.4 percent in the optimistic case and fall to 1.1 percent each under the pessimistic scenario.

Energy Efficiency and Demand Response

Energy efficiency is a zero-emission strategy to reduce greenhouse gas emissions in the electricity sector. Energy efficiency and conservation programs also reduce energy costs, which makes businesses more competitive and allows consumers to save money. In addition, energy efficiency reduces the cost of meeting peak demand during periods of high temperatures and high prices. By reducing the demand for electricity, energy efficiency programs also play a major role in increasing reliability of the electricity system by reducing stress on existing power plants and the transmission system and reducing the demand for new power plants and transmission infrastructure.

Because of the state's energy efficiency standards and efficiency and conservation programs, California's energy use per person has remained stable for more than 30 years while the national average has steadily increased. However, stabilizing per capita electricity use will not be enough to meet the carbon reduction goals of AB 32. To meet those goals, the state must increase its efforts to achieve all cost-effective energy efficiency. Many of these efforts will be carried out by the investor-owned utilities and the publicly owned utilities, both of which are governed by legislative and regulatory mandates to identify and develop energy efficiency potential and to set annual savings goals. The Energy Commission then uses these goals as the basis for developing its statewide energy efficiency goals.

Strategies to achieve all cost-effective energy efficiency and greenhouse gas emissions reduction goals include promoting the development of zero net energy buildings, increased building and appliance standards, and better enforcement of those standards.

A zero net energy building merges highly energy-efficient building construction, state-of-the-art appliances and lighting systems, and high performance windows to reduce a building's load and peak requirements and can include on-site solar water heating and renewable energy, such as solar photovoltaic, to meet remaining energy needs. The result is a grid-connected building that draws energy from, and feeds surplus energy to, the grid. Making zero net energy buildings a reality by 2020 for residences and 2030 for commercial buildings will require ongoing collaboration among the Energy Commission, the California Public Utilities Commission, and the Air Resources Board; coordination with local governments that have the authority over land use development and planning; and collaboration with the building industry.

California's building and appliance standards provide a significant share of energy savings from reduced energy demand. The 2008 Building Efficiency Standards will take effect on January 1, 2010, and will require, on average, a 15 percent increase in energy efficiency savings compared with the 2005 Building Efficiency Standards. The 2009 Appliance Efficiency Regulations became effective statewide on August 9, 2009, and, as required by AB 1109 (Huffman, Chapter 534, Statutes of 2007), set new efficiency standards for general purpose lighting of a phased 50 percent increase in efficiency for residential general service lighting by 2018. The first phase takes effect January 1, 2010.

Another issue associated with energy efficiency is how to incorporate the expected energy savings from meeting the state's long-term energy efficiency goals into the Energy Commission's electricity and natural gas demand forecast. Not all of the specific efforts and programs to achieve those goals are in place, since utility programs and efforts are only approved by the California Public Utilities Commission in three-year cycles. However, it is important to understand the impacts of these expected incremental savings as part of the Energy Commission's demand forecasting efforts.

Recommendations

The Energy Commission identified the following efficiency-related recommendations as the highest priority actions California needs to take to reach its energy efficiency goals:

The Energy Commission will adopt and enforce building and appliance standards that put California on the path to zero net energy residential buildings by 2020 and zero net energy commercial buildings by 2030.

The Energy Commission and the California Public Utilities Commission should work together to develop and implement audit, labeling, and retrofit programs for existing buildings that achieve all cost-effective energy efficiency measures, maximize the benefit of existing utility programs, and expand the use of municipal and utility on-bill financing opportunities.

The Energy Commission will use the 2009 adopted forecast as a starting point to estimate the incremental impacts from future efficiency programs and standards that are reasonably expected to occur, but for which program designs and funding are not yet committed. Staff is planning to use and possibly modify Itron's forecasting model, SESAT, for this new purpose, with Itron providing training for the model in early 2010. The Energy Commission, in cooperation with the California Public Utilities Commission, the investor-owned utilities, and the publicly owned utilities, will devote sufficient resources to develop in-house capability to differentiate these future energy efficiency savings from energy efficiency savings that are already accounted for in the demand forecast.

Renewable Energy

Renewable energy is the first supply-side resource in the loading order and a key strategy for achieving greenhouse gas emission reductions from the electricity sector. Increasing the amount of renewable energy in California's electricity mix also reduces the risks and costs associated with potentially high and volatile natural gas prices while also reducing the state's dependence on imported natural gas used to generate electricity. Renewable resources also provide other benefits such as economic development and new employment opportunities - benefits that have become increasingly important given the current recession.

Challenges with increasing the amount of renewable resources in California's electricity mix are plentiful. They include the difficulty of integrating large amounts of renewable energy into the electricity system; uncertainty on the timeline for meeting Renewables Portfolio Standards goals; environmental concerns with the development of renewable facilities and associated transmission; difficulty in securing project financing; delays and duplication in siting processes; time and expense of new transmission development; the cost of renewable energy in a fluctuating energy market; and maintaining the state's existing baseline of renewable facilities.

The Renewables Portfolio Standard requires retail sellers (defined as investor-owned utilities, electric service providers, and community choice aggregators) to increase renewable energy as a percentage of their retail sales to 20 percent by 2010. State law also requires publicly owned utilities to implement the standard but gives them flexibility in developing specific targets and timelines. In November 2008, Governor Schwarzenegger raised California's renewable energy goals to 33 percent by 2020 in his Executive Order S-14-08, and in September 2009, Executive Order S-21-09 directed the Air Resources Board to develop regulations by July 31, 2010, for a 33 percent Renewable Energy Standard.

In July 2009, the California Public Utilities Commission reported that the three investor-owned utilities were supplying approximately 13 percent of their aggregated total sales from eligible renewable resources as of 2008, far below the 20 percent required by 2010. Publicly owned utilities are showing some progress in renewable energy procurement with expectations for the 15 largest publicly owned utilities of 12.4 percent of Renewables Portfolio Standard-eligible renewable retail sales by 2011, but this progress still falls far short of the renewable target.

Not all renewable generators provide the operating characteristics that the system needs to maintain local area reliability, and integrating certain renewable technologies can make it more difficult to operate the system reliably. While geothermal and biomass resources can provide baseload power, resources like wind, hydro, and solar are intermittent and not always available to meet system needs during peak hours. Intermittent resources can also drop off or pick up suddenly, requiring quick action by system operators to compensate for the sudden changes. Significant energy storage will be required to integrate future levels of renewables, thus allowing better matching of renewable generation with electricity needs. These technologies can also reduce the number of natural gas-fired power plants that would otherwise be needed to provide the characteristics the system needs to operate reliably. However, many storage technologies are still in the research and development stage, are relatively expensive, and need further refinement and demonstration.

Governor Schwarzenegger's Executive Order S-06-06 further requires the state to meet 20 percent of the Renewables Portfolio Standard with biopower. However, new biomass facilities continue to face barriers to development. There is significant potential for renewable generation fueled by biomethane from the state's dairies, but the high cost of emissions controls interferes with dairies' ability to obtain air permits. New solid fuel biomass facilities also face challenges in obtaining air permits, as well as the added challenge in the South Coast Air Quality Management District of obtaining permits to emit particulate matter. Existing biomass facilities, which provide a significant portion of the state's baseload renewable capacity, also face challenges from the expiration at the end of 2011 of the Renewable Energy Program, which provides production incentives that enable them to keep operating.

While renewable energy provides obvious environmental benefits by reducing greenhouse gas emissions and criteria pollutants associated with electricity generation, the infrastructure required to add large amounts of renewable resources can have negative environmental effects. Efforts like the Renewable Energy Transmission Initiative are working to facilitate the early identification and resolution or to avoid land use and environmental constraints to promote timely development of California's renewable generation resources and associated transmission lines. Also, Governor Schwarzenegger's Executive Order S-14-08 establishes a process to conserve natural resources while expediting the permitting of renewable energy power plants and transmission lines. The Executive Order established the Renewable Energy Action Team, comprised of the Energy Commission, the California Department of Fish and Game, the federal Bureau of Land Management, and the U.S. Fish and Wildlife Service, to identify and establish areas for potential renewable energy development and conservation in the Colorado and Mojave deserts to help reduce the time and uncertainty associated with licensing new renewable projects on both state and federal lands. As part of implementing the Executive Order, the agencies are developing the Desert Renewable Energy Conservation Plan, a road map for renewable energy project development that will advance state and federal conservation goals while facilitating the timely permitting of renewable energy projects in desert regions of the state.

Recommendations

The Energy Commission identified the following recommendations for renewable energy as the highest priority actions California needs to take:

The Energy Commission, the Air Resources Board, the California Public Utilities Commission, and the California Independent System Operator must continue to work together to implement a 33 percent renewable electricity policy that applies to all load-serving entities and retail providers.

To reduce regulatory uncertainty for market participants and ensure a long-term and stable renewable energy policy framework for California, the state should pursue legislation to codify the 33 percent renewable target that was identified in Governor Schwarzenegger's Executive Orders S-14-08 and S-21-09.

The Energy Commission will work with the California Public Utilities Commission, the California Independent System Operator, the federal Bureau of Land Management, the California Department of Fish and Game, and other agencies to implement specific measures to accelerate permitting of new renewable generation and the transmission facilities needed to serve that generation. These measures include the elimination of duplication, shortened permitting timelines, and planning processes such as the Renewable Energy Transmission Initiative and the Desert Renewable Energy Conservation Plan that balance clean energy development and conservation.

To meet the Governor's target of 20 percent of the state's renewable energy goals from biomass resources that was identified in Executive Order S-06-06, the Energy Commission will facilitate and coordinate programs with other state and local agencies to address barriers to the expansion of biopower, including regulatory hurdles and project financing. The Energy Commission will also encourage additional research and development to reduce costs for biomass conversion, biopower technologies, and environmental controls.

The Energy Commission will conduct further analysis to identify solutions to integrate increasing levels of energy efficiency, smart grid infrastructure, and renewable energy while avoiding infrequent conditions of surplus generation, or overgeneration, in which more electricity is being generated than there is load to consume it. Potential solutions include better coordination of the timing of resource additions and the mix of resources added to meet customer needs efficiently and maintain system reliability, as well as additional research, development, and demonstration of existing and emerging storage technologies. In addition, there will be efforts to determine what new, more flexible, and efficient natural gas technologies best fit into an electricity grid in transition. The Energy Commission will complete an initial study of the surplus generation issue to identify specific resource and data needs as part of the 2010 Integrated Energy Policy Report Update, with an in-depth analysis forthcoming in the 2011 Integrated Energy Policy Report.

Distributed Generation and Combined Heat and Power

Distributed generation resources are grid-connected or stand-alone electrical generation or storage systems connected to the distribution level of the transmission and distribution grid and located at or very near the location where the energy is used. The benefits of distributed generation go far beyond electricity generation. Because the generation is located near the location where it is needed, distributed generation reduces the need to build new transmission and distribution infrastructure and also reduces losses at peak delivery times. Customers can use distributed generation technologies to meet peak needs or to provide energy independence and protect against outages and brownouts.

California is promoting distributed generation technologies through several programs that support distributed generation on the customer side of the meter, such as the California Solar Initiative, which includes the New Solar Homes Partnership, the California Public Utilities Commission's Self-Generation Incentive Program, and the Energy Commission's Emerging Renewable Facilities Program. Large-scale distributed generation such as combined heat and power, also referred to as cogeneration, is an efficient and cost-effective form of distributed generation. The Climate Change Scoping Plan has a target of adding 4,000 megawatts of combined heat and power capacity to displace 30,000 gigawatt hours of demand, thus reducing greenhouse gas emissions by 6.7 million metric tons of carbon by 2020.

Despite consistent emphasis in past Integrated Energy Policy Reports on the need to address barriers to the development of combined heat and power facilities, insufficient progress has been made. In an effort to push forward, the Energy Commission developed a new study of market potential for combined heat and power facilities that includes facilities smaller than 20 megawatts in size that do not typically have excess power to export to the grid. The study examined market penetration over the next 20 years for a base case (status quo) and four alternative cases that included various stimulus and incentive measures. The base case showed about 3,000 megawatts of combined heat and power market penetration, including both generation capacity and avoided electric air conditioning. (The study included alternative incentive scenarios, one of which made available an additional 497 megawatts of combined heat and power for addition to the base case in the event of the passage of SB 412 [Kehoe, Chapter 182, Statutes of 2009]. The bill became law in October.) Implementation of all of the stimulus efforts and incentives used in the alternative cases would more than double market penetration over the next 20 years to about 6,500 megawatts, exceeding the Air Resources Board's 4,000 megawatt target for capacity additions.

Recommendations

The Energy Commission identified the following recommendation as the highest priority action California needs to take to support combined heat and power development in the state:

The Energy Commission will work with the Air Resources Board in the development of combined heat and power to meet the state goals for emission reductions from this technology. Actions include mandates to remove market barriers to the development of combined heat and power facilities and the provision of analytical support on efficiency requirements and other technical specifications so that combined heat and power is more widely viewed and adopted as an energy efficiency measure.

Nuclear Power Plants

As part of the 2008 Integrated Energy Policy Report Update, the Energy Commission developed An Assessment of California's Nuclear Power Plants: AB 1632 Report, as directed by AB 1632 (Blakeslee, Chapter 722, Statutes of 2006). The report addressed seismic and plant aging vulnerabilities of California's in-state nuclear plants - Pacific Gas and Electric Company's Diablo Canyon Power Plant and Southern California Edison's San Onofre Nuclear Generating Station - including reliability concerns as well as concerns over safety culture, plant performance, and management issues at San Onofre. The AB 1632 Report also recommended additional studies that Pacific Gas and Electric Company and Southern California Edison should undertake as part of their license renewal feasibility studies for the California Public Utilities Commission and directed the utilities to provide a status report on their efforts toward implementing the recommendations in the AB 1632 Report in the 2009 Integrated Energy Policy Report.

Major policy decisions that will be made in the next several years will shape the next three decades of nuclear energy policy in California. An overarching issue with the state's nuclear facilities is plant license renewal. The Nuclear Regulatory Commission operating licenses for San Onofre Units 2 and 3 are set to expire in 2022, and for Diablo Canyon Units 1 and 2, in 2024 and 2025, respectively. Pacific Gas and Electric announced on November 24, 2009, its intention to file a license renewal application for Diablo Canyon, and Southern California Edison plans to file for license renewal for San Onofre in late 2012.

The Nuclear Regulatory Commission license renewal application process determines whether a plant meets its renewal criteria, but not whether the plant should continue to operate. The Nuclear Regulatory Commission specifically states that it "has no role in the energy planning decisions of State regulators and utility officials as to whether a particular nuclear power plant should continue to operate." It is left to state regulatory agencies to determine whether it is in the best interest of ratepayers and cost effective to continue operation of their state's nuclear plants.

Although the California Public Utilities Commission does not approve or disapprove license applications filed with the Nuclear Regulatory Commission, both Pacific Gas and Electric and Southern California Edison must obtain the California Public Utilities Commission's approval to pursue license renewal before receiving California ratepayer funding to cover the costs of the Nuclear Regulatory Commission license renewal process. The utilities' submission of license renewal feasibility assessments to the California Public Utilities Commission initiates the California Public Utilities Commission's license renewal review proceedings. The California Public Utilities Commission proceedings will not only consider energy planning issues and whether continued operation of the nuclear power plants is in the ratepayers' best interest, but will also consider matters of state jurisdiction such as the economic, reliability, and environmental implications of relicensing.

The California Public Utilities Commission's General Rate Case Decision 07-03-044 required Pacific Gas and Electric to incorporate the Energy Commission's AB 1632 assessment findings and recommendations in its license renewal feasibility study and to submit the study to the California Public Utilities Commission no later than June 30, 2011, along with an application on whether to pursue license renewal for Diablo Canyon. Letters on June 25, 2009, from the president of the California Public Utilities Commission to Pacific Gas and Electric and Southern California Edison reiterated the requirement for each utility to complete the AB 1632 Report's recommended studies, including the seismic/tsunami hazard and vulnerability studies, and report on the findings and the implications of the studies for the long-term seismic vulnerability and reliability of the plants. These studies are necessary to allow the California Public Utilities Commission to properly undertake its obligations to ensure plant and grid reliability in the event that either Diablo Canyon or San Onofre has a prolonged or permanent outage and for the California Public Utilities Commission to reach a decision on whether the utilities should pursue license renewal. However, the utilities' reports to date indicate they are not on schedule to complete these activities in time for California Public Utilities Commission consideration. In addition, both utilities have Pacific Gas and Electric has indicated objections to providing some of the studies and/or requirements indicated by the AB 1632 Report and the California Public Utilities Commission General Rate Case Decision.

The Energy Commission believes that the comprehensiveness, completeness, and timeliness with which both utilities provide the studies identified in the AB 1632 Report will be a critical part of the California Public Utilities Commission and Nuclear Regulatory Commission reviews of the utilities' license renewal applications.

Recommendations

The Energy Commission identified the following recommendation as the highest priority action California needs to take to help ensure nuclear plant reliability and to minimize costly outages:

Pacific Gas and Electric Company and Southern California Edison should complete all of the studies recommended in the Assembly Bill 1632 Report, should make their findings available for consideration by the Energy Commission, and should make their findings available to the California Public Utilities Commission and the U.S. Nuclear Regulatory Commission during their reviews of the utilities' license renewal applications.

Transmission and Distribution

The state's transmission and distribution system is another critical component of the electricity sector for serving California's growing population and integrating renewable energy. The 2009 Strategic Transmission Investment Plan describes the immediate actions that California must take to plan, permit, construct, operate, and maintain a cost-effective, reliable electric transmission system that is capable of responding to important policy challenges such as achieving significant greenhouse gas reduction and Renewables Portfolio Standard goals. The plan makes a number of recommendations intended to make the critical link between transmission planning and permitting so that needed projects are planned for, have corridors set aside as necessary, and are permitted in a timely and effective manner that maximizes existing infrastructure and rights-of-way, minimizes land use and environmental impacts, and considers technological advances.

Recommendations

The Energy Commission supports the many recommendations made in the 2009 Strategic Transmission Investment Plan and highlights the following recommendations:

The Energy Commission staff will work with the recently formed California Transmission Planning Group and the California Independent System Operator in a concerted effort to establish a 10-year statewide transmission planning process that uses the Energy Commission's Strategic Plan proceeding to vet the California Transmission Planning Group plan described in Chapter 4 of the 2009 Strategic Transmission Investment Plan, with emphasis on broad stakeholder participation.

The Energy Commission staff will work with the California Independent System Operator, the California Public Utilities Commission, investor-owned utilities, and publicly owned utilities to develop a coordinated statewide transmission plan using consistent statewide policy and planning assumptions.

Coordinated Electricity System Planning

California has numerous agencies that are involved in electricity planning. While there is some degree of coordination among various agencies and processes, the state needs to find better ways to coordinate and streamline the collective responsibilities of those agencies to achieve the state's greenhouse gas emission reduction, environmental protection, and reliability goals while reducing duplicative or contradictory processes. California needs to better coordinate its electricity policy, planning, and procurement efforts to eliminate duplication and to ensure that planners and policy makers understand the interactions and conflicts that may exist among state energy policy goals.

Recommendation

The Energy Commission identified the following recommendation as the highest priority action needed for the state to identify resource needs over both the short and long term:

The Energy Commission will work with the California Public Utilities Commission and California Independent System Operator, along with other agencies and interested stakeholders, to develop a common vision for the electricity system to guide infrastructure planning and development. Such coordinated plans can be used to guide each agency's own infrastructure approval and licensing responsibilities and thus maximize coordinated action to achieve state energy policy goals.

Addressing Procurement in the Hybrid Market

At the October 14, 2009, Integrated Energy Policy Report Committee Hearing on the draft IEPR, the IEPR Committee solicited comments from parties on how the state should address the current hybrid electric procurement market (a market split between utility-owned generation and contracted third party generation) and improve the investor-owned utility procurement process for electric generation. These issues are critical to state energy policy but did not receive sufficient analysis throughout the 2009 IEPR process. The Independent Energy Producers Association submitted comments expressing support for an examination of the hyrid market structure to determine if it is functioning properly and achieving its original goal of providing a level playing field for utility-owned and independent power generation. In addition, the Western Power Trading Forum submitted comments expressing concerns that utility domination of infrastructure investment is potentially detrimental to competitive wholesale and retail markets and therefore potentially detrimental to technological innovation. The Forum asserts that the existing hybrid market structure requires ratepayers to bear the financial and operational risks associated with new investment and ignores the market's capabilities to actively manage and hedge those risks, and it believes that improving competition at the wholesale and retail levels would create downward pressure on prices.

Recommendation

The Energy Commission supports the following recommendation:

The Energy Commission believes these issues deserve a fuller vetting, including an assessment of alternative market models that would better serve the goal of reduced cost to customers. The Energy Commission will invite the California Public Utilities Commission to participate in a more complete evaluation of the existing hybrid market structure as part of the 2010 Integrated Energy Policy Report Update to identify possible market enhancements and changes to utility procurement practices that would facilitate the reemergence of merchant investment.

The Natural Gas Sector

Natural gas is the cleanest of the fossil fuels used in the state and will continue to be a significant energy source for the foreseeable future. Maintaining a reliable natural gas delivery and storage infrastructure is therefore important to support the receipt and delivery of adequate supply to California's millions of natural gas consumers and keep prices low for the residential, commercial, industrial, and electric generation sectors. An expanding California natural gas infrastructure also will allow for the efficient delivery to California of increasing domestic shale gas production and liquefied natural gas imports.

As recently as two years ago, domestic natural gas production and imports to California were on the decline, and liquefied natural gas was seen as a source to better serve the natural gas needs of California. The recent development of natural gas shale formations has contributed to increased domestic production of natural gas, and liquefied natural gas does not seem to be a priority fuel for California at this time. If private investors are willing to invest in liquefied natural gas facilities without committing taxpayer or ratepayer funds, however, liquefied natural gas should be considered a viable option. The Energy Commission does not oppose development of liquefied natural gas facilities as long as liquefied natural gas development is consistent with the state's interests in balancing environmental protection, public safety, and local community concerns to ensure protection of the state's population and coastal environment.

While there is widespread agreement that the physical market factors of supply and demand are primary contributors to natural gas prices and volatility, there also is growing interest and concern about the influence financial market factors, particularly commodity speculation, have on natural gas prices and volatility. The growth in speculative commodity trading from nontraditional participants, such as pension funds, university endowments, hedge funds, and index portfolios, has changed the futures market. Unlike traditional participants like utilities and refiners who used the market to hedge against volatile energy costs, these new participants use the market as an opportunity for profit. Significant disagreement exists about the influence speculative trading has on the natural gas market, prices, and volatility.

Finally, past efforts to forecast natural gas prices have been highly inaccurate compared to actual prices, even when price volatility was largely dominated by traditional, physical market factors. Additionally, as the United States continues moving toward a carbon-constrained existence, future greenhouse gas policies will further complicate these efforts, likely rendering future natural gas price forecasts even less accurate and more uncertain. The uncertainty associated with predicting major input variables and the resulting natural gas price forecasts bring into question the value of producing date-specific, single-point natural gas price forecasts.

Recommendations

The Energy Commission identified the following recommendations as the highest priorities for the state's natural gas sector:

California should work closely with western states to ensure development of a natural gas transmission and storage system that has sufficient capacity and alternative supply routes to overcome any disruption in the system, such as weather-related line freezes and pipeline breaks. The state should support construction of sufficient pipeline capacity to California to ensure adequate supply at a reasonable price.

The Energy Commission will continue to monitor the potential environmental impacts associated with shale gas extraction, including carbon footprint, volume of water use and risk of groundwater contamination, air pollution, and potential chemical leakage. Specifically, the Energy Commission staff will coordinate and exchange information with energy agencies in states with shale gas development, such as New York, Texas, and other midcontinent states, and will report new findings in the Integrated Energy Policy Report and other Energy Commission forums.

The Fuels and Transportation Sector

State and federal policies encourage the development and use of renewable and alternative fuels to reduce California's dependence on petroleum imports, promote sustainability, and cut greenhouse gas emissions. Governor Schwarzenegger's Executive Order S-06-06 established clear targets for increased use and in-state production of biofuels. California and the federal government also have policies to improve vehicle efficiencies and to reduce vehicle miles traveled in efforts to achieve 2050 greenhouse gas reduction targets of 80 percent below 1990 levels as directed in the Governor's Executive Order S-3-05. Until new vehicle technologies and fuels are commercialized, petroleum will continue to be the primary fuel source for California's vehicles, and the state must enhance and expand the existing petroleum infrastructure, particularly at in-state marine ports, while at the same time working to develop an alternative fuel infrastructure.

The fuels and transportation energy sector is responsible for producing the greatest volume of greenhouse gas emissions - nearly 40 percent of California's total. AB 32 does not directly address greenhouse gas emissions reduction in the transportation sector. Instead, reductions are addressed through California's Low Carbon Fuel Standard, AB 1493 (Pavley, Chapter 200, Statutes of 2002), AB 1007 (Pavley, Chapter 371, Statutes of 2005), and AB 118, the Alternative and Renewable Fuel and Vehicle Technology Program. The policies and standards resulting from these mandates will ultimately change vehicle and fuel technologies in California and accelerate the market for low carbon fuels well beyond the current level of demand.

The current recession has had a significant impact on the state's transportation sector. California's average daily gasoline sales for the first four months of 2009 were 2.1 percent lower than the same period in 2008, continuing a reduction in demand observed since 2004. Daily diesel fuel sales for the first three months of 2009 were 7.7 percent lower than the same period in 2008, continuing a declining trend since 2007. Job growth and industrial production - drivers of air travel - are also declining, causing the aviation sector to experience a drop in air traffic. Recent demand trends for jet fuel, which saw an 8.9 percent decline in 2008, are similar to diesel fuel and reflect the impact of the economic downturn and higher fuel prices.

The initial years in the Energy Commission's transportation fuel demand forecast show a recovery from the recession. Because the economic and demographic projections used in these forecasts indicate a return to economic and population growth, fuel demand in the light-duty, medium- and heavy-duty vehicles and aviation sectors tends to resume historical growth patterns. However, the mix of fuel types is projected to change significantly as the state transitions from gasoline and diesel to alternative and renewable fuels.

California needs sufficient fuel infrastructure to ensure reliable supplies of transportation fuels for its citizens. Reliance on foreign oil imports increasingly puts the state's fuel supply at risk, not only because of security and reliability concerns, but also because the marine ports are not expanding to meet expected growth in demand. Alternative and renewable fuels could face the same constraints at the ports should the state begin to rely on imports of those fuels to meet state and federal renewable fuel standards. In fact, renewable and alternative fuels face even more serious infrastructure issues, as much of the infrastructure that will soon be needed is not even in place. Both petroleum and renewable fuels face infrastructure challenges from the wholesale and distribution level all the way through to the end user.

Recommendations

The Energy Commission identified the following recommendations as the highest priorities for the fuels and transportation sector:

With the advent of new California programs such as the Alternative and Renewable Fuel and Vehicle Technology Program (a comprehensive investment program to stimulate the development and deployment of low-carbon fuels and advanced vehicle technologies), the Low Carbon Fuel Standard, and a federal waiver allowing California to set its own carbon dioxide motor vehicle emission standards, California is well positioned to develop a system of sustainable, clean, alternative transportation fuels. The state should continue on its present course of action by providing responsible agencies with the time and funding to implement these programs.

The Energy Commission will collaborate with partner agencies and stakeholders to develop policy changes to address regulatory hurdles and price uncertainty for alternative fuels, particularly biofuels, in California.

To maintain energy security, state and local agencies need to ensure that there is adequate infrastructure for the delivery of transportation fuels. The state should modernize and upgrade the existing infrastructure to accommodate alternative and renewable fuels and vehicle technologies as they are developed and to address petroleum infrastructure needs to preserve past investments and to expand throughput capacity in the state.

The Energy Commission believes that transportation energy efficiency should be pursued through increased federal vehicle fuel economy standards and more sustainable land use practices in conjunction with local governments.

The Land Use and Planning Sector

Although land use decisions are made on the local level, they often have statewide implications by directly influencing consumer transportation choices, energy consumption, and greenhouse gas emissions. The 2006 Integrated Energy Policy Report Update stated that the single largest opportunity to help California meet its statewide energy and climate change goals resides with smart growth - development that revitalizes central cities and older suburbs, supports and enhances public transit, promotes walking and bicycling, and preserves open spaces and agricultural lands. The 2007 Integrated Energy Policy Report further noted that to reduce greenhouse gas emissions, California must begin reversing the current 2 percent annual growth rate of vehicle miles traveled.

The Energy Commission is one of several state agencies helping local and regional governments make sustainable land use decisions. The California Department of Transportation coordinates local and state planning through its Regional Blueprint Planning Program. Senate Bill 375 (Steinberg, Chapter 728, Statutes of 2008) requires the Air Resources Board to set regional emissions goals by working with metropolitan planning organizations. SB 732 (Steinberg, Chapter 729, Statutes of 2008), recognizing the need for state agencies to work more closely together on this issue, created the Strategic Growth Council, a cabinet level committee composed of agency secretaries from Business, Transportation and Housing; California Health and Human Services; the California Environmental Protection Agency; and the California Natural Resources Agency, along with the director of the Governor's Office of Planning and Research.

These state agencies need to coordinate more closely to help local governments achieve the benefits of sustainable land use planning. Before adopting new state policies, state government must improve its outreach to local governments to better understand the problems they face. This includes taking into account and addressing the fiscal realities local governments confront in difficult economic times.

Recommendations

The Energy Commission makes the following recommendation related to land use planning and decisions:

To reduce energy use and support the transportation greenhouse gas emission reduction goals of SB 375, state agencies in collaboration with the Strategic Growth Council and local and regional governments will continue to conduct research, develop analytical tools, assemble easy-to-use data, and provide assistance to local and regional government officials to help them make informed decisions about energy opportunities and undertake sustainable land use practices, while recognizing the different needs of rural and urban regions.

The Potential of Carbon Capture and Sequestration

California will need innovative strategies to address greenhouse gas emissions associated with energy production and use. One such strategy is carbon capture and storage, also known as carbon capture and sequestration. The 2007 IEPR focused on geologic sequestration strategies for the long-term management of carbon dioxide, but there have been encouraging technology advancements and investments since then. Technology developers and policy makers who are examining carbon capture and sequestration applications have expanded from an initial focus on coal and petroleum coke to natural gas and refinery gas, the predominant fossil fuels used in California power plants and industrial facilities.

Recommendation

The Energy Commission makes the following recommendation related to carbon capture and sequestration:

The Energy Commission recommends that, as a mechanism for achieving state energy and environmental objectives, it continue to support and conduct carbon capture and sequestration research to demonstrate technology performance and facilitate interagency coordination to develop the technical data and analytical capabilities necessary for establishing a legal and regulatory framework for this technology in California.

Achieving Energy Goals

California needs reliable, affordable, and clean supplies of energy to serve its citizens and maintain a strong economy. The state's electricity, natural gas, and transportation sectors must continuously respond to changes in supply and demand, new policies and technologies and their associated challenges, and increasing environmental regulation. California must bolster its current energy foundation with an aggressive and wide-ranging agenda that will continue to reduce energy demand, promote development of renewable energy resources, ensure development of cleaner fossil resources, give consumers more energy choices, and build the necessary infrastructure to protect the state from future supply disruptions and high prices.

For more info about the 2009 Integrated Energy Policy Report, please contact: